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Daily Newsletter, Thursday, 04/29/2004

HAVING TROUBLE PRINTING?

The Option Investor Newsletter Thursday 04-29-2004
Copyright 2004, All rights reserved. 1 of 3
Redistribution in any form strictly prohibited.
In Section One:
Wrap: Trend Change!
Futures Markets: See Note
Index Trader Wrap: BEARS & BEAR TRAPS
Market Sentiment: Truth Or Dare?
Posted online for subscribers at http://www.OptionInvestor.com
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MARKET WRAP (view in courier font for table alignment)
************************************************************
04-29-2004 High Low Volume Adv/Dcl
DJIA 10272.27 - 70.30 10407.97 10219.18 2.30 bln 850/2400
NASDAQ 1958.78 - 30.80 1998.02 1946.10 2.37 bln 830/2362
S&P 100 544.54 - 3.30 551.53 541.69 Totals 1680/4762
S&P 500 1113.89 - 8.52 1128.80 1108.02
W5000 10867.10 -100.30 11008.24 10811.96
SOX 450.48 - 11.80 464.46 443.74
RUS 2000 567.25 - 9.81 580.45 564.44
DJ TRANS 2904.06 - 43.10 2964.52 2890.85
VIX 16.60 + 0.31 17.27 15.87
VXO (VIX-O)17.30 + 0.58 18.01 16.23
VXN 24.90 + 0.98 25.51 23.95
Total Volume 5,147M
Total UpVol 825M
Total DnVol 4,174M
Total Adv 5410
Total Dcl 1900
52wk Highs 98
52wk Lows 300
NasTRIN 2.13
TRIN 1.24
PUT/CALL 1.00
************************************************************
Trend Change!
by Jim Brown
It only took two days but the trend is on the verge of a
drastic change. The Dow hit 10537 on Tuesday and 10219 today.
In only two days the Dow has moved from the high end of its
range to the very low end of its range for the entire month.
The earnings sentiment has gone from very bullish to very
bearish despite any material change in the earnings. Fear of
the Fed, trouble in Iraq, decline in China and election fears
have all been given as excuses. Which one is it?
Dow Chart – Daily
Nasdaq Chart – Daily
The morning started out good with Jobless Claims dropping back
below 350K to 338,000 and moving back to the level we saw in
March. Something to do with the Easter holiday had bumped the
numbers back over 350K for two weeks but that anomaly appears
to have passed.
That was the extent of the good news. The Employment Cost
Index rose faster than expected at +1.1% pushed higher on
soaring benefit costs. Those costs jumped +2.4% for Q1 and
nearly double the costs for the prior three quarters. Benefits
for blue collar workers rose +3.8% and +4.2% for manufacturing
workers. This is a very strong jump for benefits where most of
the cost is due to rising healthcare. The wage component rose
only +0.6% and it was the slowest growth rate recorded to date!
That suggests the labor market is still very soft and employees
have no leverage in negotiating wages. This was not good news
for the employment picture or for future company earnings if
the trend continues.
Confirming the weak employment market was a drop in the Help
Wanted Index for March to 39. It was not a big move but it did
reverse the minor uptick from the prior month. It appears there
was some pickup in job advertising in February as the new year
got underway but that may have only have been a blip. Not an
earth shaking report compared to those we have next week but
still another crack in the economic outlook.
The biggest economic blow for the day was the GDP which only
posted a +4.2% gain in the most current estimate. Consensus
estimates had been in the +5.2% range with whisper numbers
nearing +6%. Suddenly all the constantly improving bullish
comments on the economy imploded and with it the expectations
for surging stock prices. All things considered the +4.2% rate
is very good. Everyone would be very happy to maintain that
rate for several years but the problem was expectations. The
market had priced in expectations of 5.2-5.5% or more. The
constant buzz about the very strong Q1 earnings had investors
thinking the revised GDP for the quarter was also going to be
very strong and surprise to the upside. Instead the surprise
shocked everyone back to reality. Business is good but not
great and harder times lay ahead.
That reality is also creeping into earnings. As of last weekend
78% of companies had beaten estimates for Q1. As of today that
number is down to 76% and still very respectable. The problem
is the guidance. As we get deeper into the earnings cycle the
quality of companies reporting declines and we are getting
fewer upside surprises and more downside guidance. The common
report is now predicting stronger comparisons ahead.
I have been cautioning you that this would happen but when the
markets are near their highs and the bulls are running nobody
wants to face facts. The underlying fact is simple. The economy
boomed in late 2003. Remember that +8.2% GDP in Q3-2003? The
Q2-2003 production cycle is what pushed us to much stronger
earnings and output in Q2, Q3 and Q4. That ramp up on the very
large tax rebate program in 2003 pulled us out of the depths
of recession and boosted us into high gear. We hit full speed
in late Q3 and quickly ran out of tax rebate fuel. We posted
a GDP of 4.1% in Q4, normally a strong quarter and have been
coasting through Q1 at that 4.1% rate. Companies were hoping
to pit stop in Q1 and pickup some more tax refund cash to spur
buying but as I have reported previously those refunds shrank
to about 1/4-1/3 of what was expected. Now we are faced with
the summer doldrums ahead and no gas in the economic tank.
Obviously that is a greatly simplified picture and not exactly
correct but I think you get the idea. The good news from the
lower GDP is no urgency on the part of the Fed. They were about
to go into attack mode if we had broken out over +5% and that
threat has been neutralized. We have several more critical
economic reports over the next several days and the Fed meeting
on Tuesday but the decision should already be over. Odds of a
rate hike in May or even June just went to near zero.
The market obviously did not celebrate that fact. The market
opened down and then rallied slightly on a single buy program
on the Help Wanted news and then crashed. Whoever pulled the
trigger on that buy program was probably celebrating the Fed
knockout but when the keg ran dry he found himself the only
one at the party.
Falling expectations trumped the falling chances of a rate hike.
Stocks that had been highly leveraged on the chances of a strong
economic explosion suddenly found themselves over priced for a
return to a slow growth environment. Semiconductors, techs and
small caps were dumped with no hesitation. Helping fuel the
fears of an economic slow down were comments from China that
the government was going to take "strong" steps to slow down
its overheated economy. Commodities dropped like a rock on Wed
when the comments were made. China has been on a ferocious pace
with growth at a 9.7% rate. They have been sucking up gold,
silver, copper, oil and almost every manufacturing material in
excess of current supply. Prices had been soaring. The potential
for China to suddenly slow rippled through all the markets. This
ripple was hardly warranted. The target growth rate for China is
+7.1%, hardly a recession. China's growth can be slowed by the
Premier taking strong measures as he has said but it is not
going to stop tomorrow. We all know it takes months if not years
to see any impact from economic brakes. The greed factor is alive
and well and it will always find a way to prosper if buyers are
available. Yes, comments from China did hit our markets over
the last couple days but the real impact is more imagined than
real for the time being.
Iraq and Israel were also used as excuses for the depression
in the U.S. markets. I would hope that anybody investing real
money is intelligent enough to know there has been and will be
fighting in those countries until hell freezes over. Sure, news
that ?? American soldiers were killed on any given day is still
very troubling but it is not something that should tank the
market by triple digits.
It all boils down to earnings and profits. Polite conversations
about the merits of particular stocks and the potential for the
next rally are held daily in institutions and across supper
tables. They remain polite as long as the uptrend remains
intact. Many funds, institutions and private traders have huge
profits on the table from the March rebound last year. The Dow
100 dma was not touched from April through February. It was
broken in March but quickly recovered. Trigger fingers relaxed
and traders with huge profits began to breath again. It was
broken again on the 21st but a rebound the next day put traders
back at ease. However, we all know the adage, once bitten twice
shy and the markets have been bitten several times lately. The
markets have been very nervous for the last couple of weeks.
Traders continued to hope for new highs to confirm the economic
expectations and their justifications for continuing to hold
profits from the 2003 rally. Unfortunately since the current
high for the year was set on February 19th we have seen a
steady progression of lower highs. Tuesday's push to 10537 was
the culmination of two weeks of gains but it was still a lower
high and one that was only 131 points over the 100dma. Once
that high failed with no attempted rebound the rats began
deserting the ship.
That desertion turned into a rout on Wed/Thr. Volume made new
highs for the year and it was extremely negative. On Wednesday
volume across all markets was 4.9B shares. 4.2B was down volume
with only 606 million shares of up volume, a 7:1 disadvantage.
On Thursday volume hit 5.2B shares, a record for the year, and
down volume was 4.2B with up volume only 829 million, 5:1. The
new highs/new lows number was also a disaster. Only 99 stocks
hit new highs and 303 hit new lows. To put this in perspective
that is the first time new highs have been under 100 since
March 24th, 2003. It is the first time new lows have been over
300 since March 12th, 2003. That just happens to be the day the
Dow broke under 7500 and set the low for 2003. I want to make
sure this is clear. The new high/lows for today were as bad
as the day the Dow was at the low for 2003. The difference is
about 2750 Dow points. We should not be seeing these kinds of
internals at this level in the market. This is serious but it
does not mean it will continue.
The Dow has dropped nearly -300 points in three days. It
closed today at 10272 after touching 10219. This level is
very critical. 10300 has been the bottom of our range since
March 29th. However, if you remember the March drop took us
to 10007. There is still a technical possibility that we
could hold here or at the March lows near 10000. I say
technical possibility because the sentiment has definitely
changed. It is one thing to predict higher moves when all the
earnings and economics are improving but once the dominoes
begin to fall the change in sentiment accelerates quickly. I
am not going to sugar coat this. We are at a critical point
in the market. We could continues to go either way but the
path of least resistance is definitely down.
The Nasdaq also broke critical support today and has fallen
-100 points since Monday. Further support remains at 1940 and
again at 1900 but the outlook is not good. Taking the Nasdaq
down is the semiconductor sector which broke final support on
Thursday and sank to a six month low. Take a look at the SOX
chart and the risk to the overall market will be quickly
apparent.
SOX Chart – Daily
Russell 2000 Chart – Daily
The last twig on the cliff that the bulls can cling to is the
Russell. Small caps have been taking a beating this week and
the Russell is on the verge of breaking that last critical
support at 560. We have been near this level four previous
times since January and each time there was a miraculous
recovery and it could happen again. Unfortunately the chart
is not suggesting that for tomorrow.
Before I get too bearish we all need to remember that market
events run in cycles and this cycle could just be an over
reaction to the changing trend. We have serious economic
events in our near future as well as a Fed meeting and the
GDP today was a warning. Actually it is unrelated to any of
the economics we will see over the next week but it did take
some of the complacency out of the economic expectations.
We have had two very negative days in the market. It may be
time for the bargain hunters to rush into the gap but there
are no indications yet that it will happen tomorrow.
I have been telling you to sell the tops and buy the bottoms
as long as we remained range bound. I suggested selling the
10500-10550 top of the range as recently as Tuesday. On Sunday
I suggested a break of this trend would be a move under Dow
10250 and Nasdaq 1975. Both of those levels were broken today.
The Dow regained some ground to close back above 10250 but
only slightly. The stage is set. Another drop at the open and
the bulls could be heading for summer pasture. While nobody
would expect the market to roll over and die it could be a
rocky month ahead. The majority of the initial damage has been
done and after Friday we could move sideways until after the
Fed meeting. If we rebound from 10250/1975 I would be very
cautious about going along for the ride.
Enter Passively, Exit Aggressively.
Jim Brown
Editor
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FUTURES MARKETS
***************
Futures wrap is not emailed due to the excessive number of charts.
It may be read on the website at this address.
http://www.OptionInvestor.com/indexes/futureswrap.asp
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INDEX TRADER SUMMARY
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BEARS & BEAR TRAPS
By Leigh Stevens
lstevens@OptionInvestor.com
THE BOTTOM LINE –
Now I am friendly to bears and other critters and it pays to be
friendly to the current bearish correction; read, play puts.
However, tomorrow (Friday) or the following trading day (Monday)
expect the bulls to raise the roof, if not the market, with the
bear holding sway. The market is oversold now on a short-term
basis – that's one thing.
The other thing worth noting is about bear "traps". A bear trap
is a reversal that occurs AFTER a stock or index goes to a new
relative low, followed by a fairly immediate rebound. I keep one
eye for this possibility, having gone to sleep before sitting on
good put profits figuring I was all comfy and cozy. Anyway, some
charts are seen below. That's for those who skip this section –
ha, I don't do the same thing the same way all the time.
It's clear where the prior lows were that were exceeded. Watch
for any hourly, then daily closes back above those lows noted at
the dashed (level) lines – making for a possible bear trap
reversal. What was (prior) support should now "become" resistance
– if not, well cash in some puts, don't hole up with em.
By the way, or as my e-mail savvy Son says "BTW", as in "BTW Dad
I need some more money" – the stochastic "length" setting is 21 –
the slow stochastic indicator therefore on an hourly chart
measures 21 bars = 21-hours of trading. When that indicator gets
this oversold, don't be surprised if there is a rally, even a
good one.
Also BTW, if you are a die hard bear, grisly or teddy, an hourly
close above those prior lows only suggests being alert to what is
happening in the next hour and the hour after that – there is
still needed a DAILY (the moment of truth) close above these
levels to suggest a possible short or longer-term reversal back
to the upside – these levels to watch, for penetration, are: 1118
in the S&P 500 (SPX), 546-547 in the S&P 100 (OEX), 10,282-10,287
in the Dow 30 (INDU), 1978-1980 in the Nasdaq Composite (COMP),
1437 in the Nasdaq 100 (NDX) and 35.75 in QQQ.
TODAY'S TRADING ACTIVITY –
In the too much of a good thing department that I sometimes can't
quite figure out - the Commerce Department reported today that
the U.S. economy grew at a 4.2% seasonally adjusted annual rate
in Q1" was that inflation jumped. Hey, anyone surprised!? Anyone
been at the gas pumps lately! The GDP purchases deflator
increased at a quarterly rate that represented an annual rate of
3.2%. The so-called "core" rate rose at a 2.3% rate.
Now, 3.2 is not raging inflation, but as I keep saying, when
investor and trader psychology are running scared and nervous,
the glass is half EMPTY!
The S&P 500 (SPX) closed at 1113.88, a fall of 8.5 points or 0.8%
and the Dow 30 Average closed down 70 at 10,272, but this was
after reaching 10,407 – and scaring the aforementioned bearish
ones. The Nasdaq Composite (COMP) fell 30.7 points (1.5%) to
1,958.78.
Of course, as ALWAYS happens, cause sooner or later given
sufficient economic recovery, rates are going to go back up
especially with Fed Funds, at what 1% !! – Duh – nevertheless,
when the moment of truth arrives, no one seems prepared for this
reality. As has been said, those that don't study history are
doomed to repeat it.
So, the current down swing or correction, that has been going on
for a while can be seen as an attempt to price into the indices,
that "easy money" is not going to go on forever. Fear takes over
from greed for a while? If you want to see fear, greed and
loathing, just participate in the frenzied bidding wars for
houses in place like Marin County – that's just an area I know
about, there are plenty of others that are too hot not to cool
down!
Semiconductors were among the leading sector hit in the tech
wreck slide – this after LSI Logic (LSI) put out sales targets
for Q2 that were below expectations. Needless to say, the SOX
Semiconductor index got hit, and closed down some 2.6%.
Networking stocks, oil services on profit taking, computer box
and hardware makes and airlines – remember the pump story and
hey, even frequent flyer tickets aren’t free anymore as there are
these fuel surcharge fees creeping in.
OTHER MARKETS –
Bonds also succumbed to inflation fears with the benchmark 10-
year T note down 10/32 at 95 23/32 to yield 4.54 percent vs. 4.50
percent on Wednesday – this is the highest yield since early-
September. The dollar fell 1.2% - (yea! Opps - I sold an
apartment in Spain that will close in Euros) against the euro
with the greenback finishing at $1.1984. The dollar was down 0.2
percent against the Yen to 109.82 yen.
MY INDEX OUTLOOKS –
S&P 500 Index (SPX) – Daily chart:
Hey guess, where the S&P stopped today – right on that trendline!
Amazing sometimes how that works. 1105-1108 is the key support
right now – with 1118 as key near resistance as mentioned above.
Given the oversold and the basic bullishness that still out
there, I doubt that SPX closes under 1100-1105 absent a very bad
event. Put holders, don't let those profits slip away!
The Call to Put ratio is getting more bullish but the S&P is not
a bullish play based on this indicator alone – by the end of this
correction, I anticipate a reading or two at and below the
bullish line – which is when equity put activity gets more heavy
than it is now. One of those contrary facts of life, is that the
herd is wrong. Maybe bulls should avoid packs and bears only
lead a solitary existence.
S&P 100 Index (OEX) – Daily chart:
With the looks of the downtrend channel, the oversold reading
coming up and all, downside looks limited to 540, maybe one shot
down to 535 – take put profits and run and take a fling in OEX
calls if 535 is seen.
Nasdaq 100 (NDX) Index – Daily:
1410, maybe a quick dip to 1400, is my target on NDX, with upside
potential back up; to 1450 on a rebound.
Nasdaq 100 tracking Stock (AMEX:QQQ)– Hourly:
Contrary to what I said about a target to 35, then maybe to 34.50
or 34, in the short-term I think that the Q's could rally
some first, probably back up to 36.30 or so.
I am covering short positions Friday and play the bounce – but
then what else does a trader do but trade – especially if I don't
buy options looking for a short bounce at this juncture.
Good Trading Success!
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MARKET SENTIMENT
****************
Truth Or Dare?
- J. Brown
The major indices hit new monthly lows but managed a weak end of
day rebound to lessen the sting of Thursday's losses. The
markets remain in their trading range but now here at the low end
of the range the question remains. Will investors buy the
bottom?
There are plenty of sectors and stocks that are approaching
short-term oversold conditions and we're due for a bounce. The
NASDAQ composite is one of them, down four days in a row. It
just happened to rebound from the 1950 level outlined as
potential support in the wrap on Wednesday. Underpinning this
area is the 200-dma about 20 points below it.
Weighing on tech stocks was a significant drop in the
semiconductor index (SOX). The SOX pierced support at the 450
level intraday but managed a rebound to close (just barely) above
it. The SOX, like many of the tech sector indices, have seen
four strong days of declines. The NWX networking index, thanks
to more weakness from Nortel Networks and Cisco Systems, broke
down and closed under key support at its 200-dma and the 250
level.
The +4.2% GDP number was less than the 5% growth expected and
probably would have eased some fears regarding the proximity of
any rate hike. Unfortunately, with the GDP report was the
personal consumption expenditure index, a key gauge of inflation,
that came out pretty strong. This effectively revived the rate
hike specter once again.
Noteworthy was the market's internals. They've been very bearish
the last couple of days. The advance/decline numbers were pretty
dark today with losers outnumbering winners 3-to-1 on the NYSE
and 23-to-8 on the NASDAQ. Down volume completely overshadowed
up volume 4-to-1 on the NYSE and nearly 6-to-1 on the NASDAQ.
Tomorrow brings even more economic data that will steal the focus
from corporate earnings as Wall Street frets over next Tuesday's
FOMC meeting.
-----------------------------------------------------------------
Market Averages
DJIA ($INDU)
52-week High: 10753
52-week Low : 8305
Current : 10272
Moving Averages:
(Simple)
10-dma: 10399
50-dma: 10404
200-dma: 9967
S&P 500 ($SPX)
52-week High: 1163
52-week Low : 898
Current : 1113
Moving Averages:
(Simple)
10-dma: 1130
50-dma: 1130
200-dma: 1072
Nasdaq-100 ($NDX)
52-week High: 1559
52-week Low : 1084
Current : 1431
Moving Averages:
(Simple)
10-dma: 1463
50-dma: 1452
200-dma: 1408
-----------------------------------------------------------------
Volatility indices continued their march higher but they remain
within their recent trading range. If the range holds true then
we could see a bullish reversal in the markets soon.
CBOE Market Volatility Index (VIX) = 14.07 +0.30
CBOE Mkt Volatility old VIX (VXO) = 14.98 +0.04
Nasdaq Volatility Index (VXN) = 21.84 +0.01
-----------------------------------------------------------------
Put/Call Ratio Call Volume Put Volume
Total 1.00 797,749 798,591
Equity Only 0.77 664,197 513,577
OEX 1.05 31,395 33,244
QQQ 2.69 48,744 131,405
-----------------------------------------------------------------
Bullish Percent Data
Current Change Status
NYSE 74.7 - 1 Bull Confirmed
NASDAQ-100 47.0 - 9 Bear Confirmed
Dow Indust. 80.0 - 3 Bear Confirmed
S&P 500 71.6 - 3 Bear Confirmed
S&P 100 73.0 - 1 Bear Confirmed
Bullish percent measures the number of stocks in an index
currently trading on a buy signal on their point and figure
chart. Readings above 70 are considered overbought, and readings
below 30 are considered oversold.
Bull Confirmed - Aggressively long
Bull Alert - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert - Take defensive action if long
Bear Confirmed - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend
-----------------------------------------------------------------
5-dma: 3.59
10-dma: 2.69
21-dma: 1.83
55-dma: 1.49
Extreme readings above 1.5 are bullish, and readings below .85
are bearish. These signals don't occur often and tend be early,
but when they do, they can signal significant market turning
points.
-----------------------------------------------------------------
Market Internals
-NYSE- -NASDAQ-
Advancers 712 830
Decliners 2127 2303
New Highs 48 59
New Lows 94 53
Up Volume 438M 336M
Down Vol. 1739M 1983M
Total Vol. 2289M 2332M
M = millions
-----------------------------------------------------------------
Commitments Of Traders Report: 04/20/04
Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the
Chicago Mercantile Exchange and Chicago Board of Trade. COT data
can be found at www.cftc.gov.
Small specs are the general trading public with commercials being
financial institutions. Commercials are historically on the
correct side of future trend changes while small specs tend
to be wrong.
S&P 500
Commercials still not willing to place in big one-sided bets.
The remain net short. Small traders upped their bearish
positions by a couple of thousand contracts.
Commercials Long Short Net % Of OI
03/30/04 407,987 420,624 (12,673) (1.5%)
04/06/04 409,429 419,471 (10,042) (1.2%)
04/12/04 412,827 419,910 ( 7,083) (0.9%)
04/20/04 409,729 421,456 (11,727) (1.4%)
Most bearish reading of the year: (111,956) - 3/06/02
Most bullish reading of the year: 23,977 - 12/09/03
Small Traders Long Short Net % of OI
03/30/04 130,112 81,937 48,175 22.7%
04/06/04 130,262 80,174 50,088 23.8%
04/12/04 135,840 89,090 46,750 20.8%
04/20/04 136,699 92,982 43,717 19.0%
Most bearish reading of the year: (1,657)- 5/27/03
Most bullish reading of the year: 114,510 - 3/26/02
E-MINI S&P 500
Commercials remain heavily net short the e-minis and small
traders, who typically do the opposite, are right on track
with heavy long positions.
Commercials Long Short Net % Of OI
03/30/04 265,492 305,797 (40,305) ( 7.1%)
04/06/04 270,904 328,862 (57,958) ( 9.7%)
04/12/04 261,889 341,163 (79,274) (13.1%)
04/20/04 275,985 355,555 (79,570) (10.1%)
Most bearish reading of the year: (354,835) - 06/17/03
Most bullish reading of the year: 133,299 - 09/02/03
Small Traders Long Short Net % of OI
03/30/04 123,494 59,550 63,944 35.0%
04/06/04 148,737 46,235 102,502 52.6%
04/12/04 172,473 52,274 120,199 53.5%
04/20/04 186,799 69,137 117,662 46.0%
Most bearish reading of the year: (77,385) - 09/02/03
Most bullish reading of the year: 449,310 - 06/10/03
NASDAQ-100
Very little movement in the NDX futures for commercial
traders. The same can be said for small traders.
Commercials Long Short Net % of OI
03/30/04 52,749 67,967 (15,218) (12.6%)
04/06/04 54,862 34,762 20,100 22.4%
04/12/04 54,144 34,432 19,712 22.3%
04/20/04 54,852 35,964 18,888 20.8%
Most bearish reading of the year: (21,858) - 08/26/03
Most bullish reading of the year: 13,386 - 03/16/04
Small Traders Long Short Net % of OI
03/30/04 8,928 16,551 (7,623) (30.0%)
04/06/04 7,971 20,721 (12,750) (44.4%)
04/12/04 8,297 20,746 (12,449) (42.9%)
04/20/04 8,538 19,431 (10,893) (39.0%)
Most bearish reading of the year: (10,769) - 06/11/02
Most bullish reading of the year: 19,088 - 01/21/02
DOW JONES INDUSTRIAL
Hmm... we're seeing a little bit of money getting shuffled
around here. Commercials are slightly more bullish this
week. Small traders, as expected, have turned more bearish.
Commercials Long Short Net % of OI
03/30/04 23,642 22,180 1,462 3.2%
04/06/04 23,101 22,108 993 2.2%
04/12/04 23,501 22,748 753 1.6%
04/20/04 24,156 22,009 2,147 4.7%
Most bearish reading of the year: (8,322) - 1/16/01
Most bullish reading of the year: 15,135 - 10/16/01
Small Traders Long Short Net % of OI
03/30/04 7,020 6,711 309 2.3%
04/06/04 7,316 8,085 (769) (5.0%)
04/12/04 6,136 7,450 (1,314) (9.7%)
04/20/04 5,997 9,631 (3,634) (23.3%)
Most bearish reading of the year: (12,106) - 3/09/04
Most bullish reading of the year: 8,523 - 8/26/03
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The Option Investor Newsletter Thursday 04-29-2004
Copyright 2004, All rights reserved. 2 of 3
Redistribution in any form strictly prohibited.
In Section Two:
Dropped Calls: APA, MBG
Dropped Puts: None
Call Play Updates: BBY, BEC, DGX, MIK, WFMI,
New Calls Plays: AU, GDW
Put Play Updates: COF
New Put Plays: ASD, SLAB
****************
PICKS WE DROPPED
****************
When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.
CALLS:
*****
Apache Corp. - APA - close: 41.67 change: -1.90 stop: 42.00
Now this is simply an example of bad timing! No sooner did we
add coverage of APA than the stock spiked up enough to lure us
into new positions and then head south. Yesterday's drop wasn't
so back, but today's price action was a disaster. The stock
responded to the weakness in the price of crude and overcorrected
to the downside, smashing the 50-dma ($42.18) in the process of
hitting our stop at $42. There's nothing left to do here but
clean up the mess. Use any rebound back near the $43 level as an
opportunity to exit at a more favorable level.
Picked on April 27th at $44.27
Change since picked: -2.60
Earnings Date 4/22/04 (confirmed)
Average Daily Volume = 2.40 mln
--
Mandalay Resort Group - MBG - cls: 58.35 chg: -0.95 stop: 58.99
We're still fundamentally bullish on MBG and the stock is still
in a steady up trend. Its P&F chart remains in a bullish buy
signal. However, the breakdown under round-number support at
$60.00 and its 21-dma doesn't look healthy. We were never
triggered on this play since MBG never traded above $61.51.
However, more aggressive bulls might want to look for a bounce
from the simple 50-dma as a potential entry point.
Picked on April xx at $ 00.00
PUTS:
*****
None
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********************
PLAY UPDATES - CALLS
********************
Best Buy Co - BBY - close: 54.18 change: -0.46 stop: 51.99
The last couple of days have been pretty rough on the stock
market but BBY has weathered it relatively well. Shares
consolidated sideways between $54 and $56 until the last couple
of hours on Thursday. Fortunately, BBY rebounded back above the
$54 level ahead of the closing bell. We're still bullish on the
stock and its head-and-shoulders pattern is still in effect but
traders looking for new positions might want to wait for BBY to
trade back above $55 or $56 before initiating plays.
Picked on April 23 at $ 55.05
Change since picked: - 0.87
Earnings Date 03/31/04 (confirmed)
Average Daily Volume: 3.6 million
---
Beckman Coulter - BEC - cls: 56.07 chg: +0.57 stop: 54.99
The good news is that BEC bounced from support at $55.00 as we
expected it too. The bad news is that we're out of time. BEC is
due to report earnings on Monday and that means we're going to
close this play tomorrow at the closing bell. We do not suggest
readers hold over the announcement nor do we suggest new
positions even though this is a bounce from support.
Picked on April 18 at $ 56.16
Change since picked: - 0.09
Earnings Date 05/03/04 (confirmed)
Average Daily Volume: 333 thousand
---
Quest Diagnostics - DGX - close: 84.35 change: -0.90 stop: 82.00
Despite a strong looking breakout in DGX last week, broad market
weakness has conspired against the stock over the past few days,
keeping it from continuing its upward trajectory. To its credit
though, DGX has held up fairly well in light of the heavy market-
wide selling, consistently finding support near the $84 level.
Recall that we were looking for a dip into the $83-84 area to
give us an attractive entry into the play. We've gotten the dip,
and now we need the rebound in order to justify the entry. The
10-dma ($83.83) is rising to meet support near this week's lows
and should help to catalyze the rebound we're expecting. More
conservative players may want to wait for a rally back over the
$85.50 level before venturing into the play. Maintain stops at
$82, which is solidly below the bottom of last week's gap.
Picked on April 25th at $86.15
Change since picked: -1.80
Earnings Date 4/22/04 (confirmed)
Average Daily Volume = 675 K
---
Michaels Stores - MIK - cls: 49.45 chng: -1.41 stop: 48.50
After being stymied near the $52 resistance level, MIK had
drifted back to find support near the $51 level and we were just
waiting for the next catalyst to get the stock moving again.
Well the action over the past two days has certainly gotten the
stock moving again, but it certainly isn't what we were hoping
for. MIK has succumbed to the selling pressure in the broad
market and took a big hit on Thursday, dipping briefly below the
30-dma ($49.23) before a very slight rebound at the end of the
day. Today's drop brings the stock right back to testing former
resistance as new support and we need to see the $49 level hold
as support. This may turn out to be a gift of an entry point,
but we really need to see the bounce get underway before taking
action. The 50-dma ($48.53) has now inched over our $48.50 stop,
so that should provide a bit of additional protection until the
uptrend can resume.
Picked on April 20th at $51.23
Change since picked: -1.78
Earnings Date 5/26/04 (confirmed)
Average Daily Volume = 332 K
---
Whole Foods Market - WFMI - cls: 79.98 chng: -0.38 stp: 9.25*new*
No matter how you look at it, the past two days have been brutal
to bulls in the broad market and there have been very few stocks
or sectors that have been spared the punishment. WFMI is one of
the few bright spots though and we really can't say why except to
speculate that investors are remaining optimistic ahead of next
week's earnings report. Since breaking out over $80 last week,
the stock has been gravitating to that price magnet. Earnings
are set to be released next Wednesday, so we're actually a bit
too close for suggesting new entries, except perhaps on a
breakout over $81.10 and even that should only be considered by
aggressive traders. We're still hoping for another breakout to
take the stock up to the $83-84 area and a broad market rebound
would certainly get things moving in the right direction. But at
the same time, we're attempting to keep squeezing our stop
tighter to minimize the amount we'll give back if price does
reverse. We've been talking about trailing stops just under the
10-dma, and with that average rising to $79.28 today, we're
raising our stop just a bit further to $79.25.
Picked on April 15th at $76.01
Change since picked: +3.97
Earnings Date 5/05/04 (confirmed)
Average Daily Volume = 691 K
**************
NEW CALL PLAYS
**************
Anglogold - AU - close: 31.34 change: +0.57 stop: 30.49
Company Description:
AngloGold is a major global gold producer with 19 operations, in
8 countries worldwide. The company also has extensive and
focused exploration activities in 10 countries.
(source: company website)
Why We Like It:
Gold and gold stocks have been getting crushed lately. Gold has
dropped from its early April highs near $430 an ounce to almost
$380 intraday on Wednesday. The XAU gold & silver index has
plummeted with it to new seven-month lows. Shares of AU have
likewise fallen precipitously. So why are we considering a
bullish play? We have a couple of reasons but first we must
disclose that this is a very high-risk play. We only recommend
it for speculators willing to handle the volatility. We are
going to use a tight stop loss to try and limit our risk but with
every play we list it's never a guarantee.
First of all, why go long gold now? Gold has been getting
whacked on the strength in the U.S. dollar. However, the U.S.
dollar has been struggling with resistance at its 200-dma (we're
using the Qcharts symbol DX00Y). Today the dollar dropped
strongly after failing at resistance again. This looks like a
bearish reversal for the dollar and that lead to a decent
intraday rebound for gold. Looking at the gold futures we see a
small "hammer" candlestick with the bounce above $380. So we
have a potential one-day bearish reversal in the dollar and a
potential one-day bullish reversal in gold.
Now why AU? Shares of AU are seriously oversold. The stock
closed at $42.27 in March and it closed at $30.77 yesterday.
That's a 27% drop in a month. AU probably suffered more than
some of its peers because the company issued an earnings warning
several days ago due to a drop in output. Earnings were out this
morning and while the headline number was bad analysts commenting
on the report said the results were not as bad as expected. We
also like AU for a few technical reasons. Its daily/weekly chart
shows the stock bouncing from its long-term trendline stretching
back to October 2002. This is bolstered by historical support
near $30.00 from last summer. Plus, its P&F chart, as abysmal as
it looks, has already reached its bearish price target. That
doesn't mean it can't keep dropping but the potential for a
turnaround is there.
How are we going to play AU? We're going to use a TRIGGER at
$32.01. Shares of AU failed several times this morning just
under the $32.00 mark. If we use a trigger to catch a breakout
we'll be playing the upward momentum from a deeply oversold
condition. However, if we are triggered we'll use a tight stop
under yesterday's low at $30.49. There is plenty of overhead
resistance as the stock stepped its way down but hopefully it can
step its way up too. Remember, this is a speculative rebound
play. Essentially we're trying to catch the proverbial "falling
knife" because it appears to have finally hit the floor.
Suggested Options:
We're going to suggest the June calls. Our favorites are the
June 30's.
BUY CALL JUN 30 AU-FF OI= 165 at $2.90 SL=1.50
BUY CALL JUN 35 AU-FG OI= 664 at $0.80 SL= --
Annotated Charts:
Picked on April xx at $ 00.00
--
Golden West Fin. - GDW - close: 104.99 change: +2.44 stop: 99.75
Company Description:
Golden West Financial Corporation is a holding company for its
wholly owned, federally chartered savings bank subsidiary, World
Savings Bank, FSB (WSB). WSB has a wholly owned subsidiary,
World Savings Bank, FSB (WTX), a federally chartered savings
bank. The company, through its financial institution
subsidiaries, operates 268 savings branches in nine states and
311 loan offices in 38 states, of which 110 loan offices are
located in savings branches. The company's primary source of
revenue is interest from loans on residential real estate and
mortgage-backed securities.
Why we like it:
The bull run in Financial stocks was more than overdue to take a
breather and recent talk of rising interest rates (along with the
weakness in the bond market) on a strengthening economy have
delivered the first decent correction in many moons. After
rallying up to the $116 level in early March, shares of GDW began
a controlled slide down to the $110 level, then at the 50-dma.
After one failed bounce, the stock broke down in early April and
fell right to the $100 mark before finding renewed buying
interest. Over the past couple weeks, the stock has been trying
to build a new base and today's strong rally looks particularly
encouraging in light of the weakness throughout the rest of the
market. GDW advanced more than 2% by the close and moved above
near-term resistance at $104.50 on strong volume. This play does
carry higher risk though, as in trying to catch a bullish play
near the bottom of the recent slide, we're confronted by the
reality that the move up over the past couple weeks could be
creating a bear flag pattern.
Additionally, even though the PnF chart is ostensibly bullish
with a price target of $139, it is currently showing us a High
Pole warning that warns of potential exhaustion by the bulls.
That said, this is the logical place to go fishing for a bullish
entry point, as the stock looks ready to reclaim some of its
recent losses and the rebound is coming from very strong support
near $100. We'd really like to see the stock prove itself to us
before playing though, so we're going to use an entry trigger at
$106, just over the 100-dma ($105.93). Once through that
barrier, we ought to see GDW make progress up toward the 50-dma
($109.75) and possibly up to strong resistance at $112-113.
Aggressive traders can enter on the initial breakout, while the
more conservative approach will be to wait for a subsequent
pullback to test support in the $104 area. Our stop will be
placed initially at $99.75, just under the intraday low on 4/15.
Suggested Options:
Shorter Term: The May $105 Call will offer short-term traders the
best return on an immediate move, as it is currently at the
money.
Longer Term: Aggressive longer-term traders can use the June $110
Call, while the more conservative approach will be to use the
June $105 Call. Our preferred option is the June $105 strike, as
it is currently at the money and should provide sufficient time
for the play to move in our favor.
BUY CALL MAY-100 GDW-ET OI= 207 at $5.70 SL=3.75
BUY CALL MAY-105 GDW-EA OI= 661 at $2.40 SL=1.25
BUY CALL JUN-105*GDW-FA OI= 209 at $3.50 SL=1.75
BUY CALL JUN-110 GDW-FB OI= 3 at $1.55 SL=0.75
Annotated Chart of GDW:
Picked on April 29th at $104.99
Change since picked: +0.00
Earnings Date 4/20/04 (confirmed)
Average Daily Volume = 661 K
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*******************
PLAY UPDATES - PUTS
*******************
Capital One - COF - close: 66.07 chg: -0.33 stop: 69.01 *new*
So far so good. The failed rally on Tuesday worked out well and
COF appears to be moving in a downward channel, albeit a narrow
one. The company did announce yesterday that it would be cutting
costs mainly through job cuts and attrition but COF management
has not decided how large the cuts will be yet. We're encouraged
by the weakness in the stock but honestly expected it to drop
faster with the major indices so weak. We'd suggest that more
aggressive traders leave their stop above $70.00 but we're going
to lower ours to $69.01, just above its 100-dma. Readers looking
for new entries can still consider failed rallies under $68.
Point-and-figure chart readers will note that COF's bearish price
target is now $57.
Picked on April 26 at $ 67.99
Change since picked: - 1.92
Earnings Date 04/21/04 (confirmed)
Average Daily Volume: 2.2 million
*************
NEW PUT PLAYS
*************
American Standard Co - ASD - cls: 104.80 chg: -1.65 stop: 107.51
Company Description:
American Standard is a global manufacturer with market leading
positions in three businesses: air conditioning systems and
service, sold under the Trane. and American Standard. brands for
commercial, institutional and residential buildings; bath and
kitchen products, sold under such brands as American Standard.
and Ideal Standard.; and vehicle control systems, including
electronic braking and air suspension systems, sold under the
WABCO. name to the world's leading manufacturers of heavy-duty
trucks, buses, SUVs and luxury cars. The company employs
approximately 60,000 people and has manufacturing operations in
28 countries. (source: company press release)
Why We Like It:
ASD is a conglomerate that sells more than toilets but that
didn't stop investors from flushing their positions. The stock
produced a bearish failed rally pattern under resistance at $110
and its simple 50-dma on Tuesday and the recent market weakness
has taken its toll on the stock price. Now shares have broken
support at its simple 100-dma and the $105 level on rising
volume. The recent consolidation now looks like a somewhat flat
bear flag pattern. Even new coverage from Bank of America at a
"buy" this morning was not enough to lift the stock very high off
its lows of the session.
We have been frequently adding ASD to the OptionInvestor.com
watch list because shareholders are expected to approve a
previously announced 3-for-1 stock split at the annual meeting
next Tuesday. Now we feel the technical damage is enough that
ASD will probably trade toward the $100 level and potentially aim
for its 200-dma near $96 (this may be a bit optimistic). Yet it
may not be a coincidence that its P&F chart's freshly minted sell
signal points to a $96 price target. We'll start the play with a
stop loss at today's high ($107.51).
Suggested Options:
Short-term traders can play the May options but you'll only have
three weeks left before they expire. We suggest the June puts.
Our favorite is the June 105 put even though open interest is
low.
BUY PUT JUN 105 ASD-RA OI= 1 at $3.80 SL=1.90
BUY PUT JUN 100 ASD-RT OI= 1 at $1.75 SL=0.90
Annotated Charts:
Picked on April 29 at $104.80
Change since picked: - 0.00
Earnings Date 04/14/04 (confirmed)
Average Daily Volume: 495 thousand
--
Silicon Labs. - SLAB - close: 50.05 change: -1.24 stop: 54.50
Company Description:
Silicon Laboratories designs, manufactures and markets
proprietary high-performance mixed-signal integrated circuits
(ICs) for the wireless, wireline and optical communications
industries. The company initially focused its efforts on
developing ICs for the personal computer modem market and is now
applying its mixed-signal and communications expertise to the
development of ICs for other high growth communications devices,
such as wireless telephones and optical network applications.
Why we like it:
The picture is turning downright gloomy for the Semiconductor
stocks, as the SOX index has really broken the 200-dma ($477) and
the 50-dma ($489) isn't that far away from giving a very bearish
signal by crossing back under the 200-dma. We tried playing the
downside in shares of SLAB last month but it didn't work out, as
the stock found support at its rising 3-month trendline. Well,
that trendline was broken yesterday and the stock distanced
itself even further from that broken support in today's session.
SLAB is fast approaching its 200-dma ($48.51). Today's drop
below $50 put the PnF chart back on a Sell signal, with a
tentative price objective of $43. Looking at the daily chart, we
can see the potential for support near the $49 level, so we'll
use a trigger at $48.40, just under the 200-dma.
Once SLAB breaks that support, we can look for a fairly swift
drop to the $45 level and with the SOX continuing to lose ground
at a rapid pace, we may not have long to wait. The $45 level, if
it does serve as support will more than likely only be a resting
point before the stock continues its downward journey towards
strong support in the $42-43 area. Aggressive traders will want
to enter on the initial break of the 200-dma, while those with a
more conservative approach can wait for a subsequent failed
bounce below $50. If entering on the breakdown, make sure to
confirm continued weakness in the SOX as well, which appears
destined for the $420 level and then the important $400 support.
We'll use a target of $43 for the play, but will keep an open
mind about a possible decline to lower levels. Initial stops are
set at $54.50, which will be just above the 50-dma ($54.55) by
tomorrow.
Suggested Options:
Aggressive short-term traders will want to use the May 50 Put.
Those with a more conservative approach will want to use the June
50 put. Our preferred option is the June 50 strike, as it is
currently at the money and should provide ample time for the play
to move in our favor.
BUY PUT MAY-50 QFJ-QJ OI=2311 at $2.40 SL=1.25
BUY PUT JUN-50*QFJ-RJ OI= 51 at $3.60 SL=1.75
Annotated Chart of SLAB:
Picked on April 29th at $50.05
Change since picked: +0.00
Earnings Date 4/26/04 (confirmed)
Average Daily Volume = 1.42 mln
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The Option Investor Newsletter Thursday 04-29-2004
Copyright 2004, All rights reserved. 3 of 3
Redistribution in any form strictly prohibited.
In Section Three:
Watch List: BSX, SLB, S, ZMH
Option Spreads: Spicing Up The Zero-Plus Strategy
Traders Corner: Planning To Fail
**********
WATCH LIST
**********
Boston Scientific - BSX - close: 40.78 change: +0.57
WHAT TO WATCH: Not many stocks were green today and we were
impressed that BSX managed to hold support at the $40.00 mark and
its simple 100-dma for the third session in a row. Its technical
oscillators are hinting at a bullish turnaround. We could
consider long positions here with a tight sop under today's low
at $39.75. Our target would be the top of the recent trading
range near $45-46.
---
Schlumberger - SLB - close: 58.88 change: -2.12
WHAT TO WATCH: The oil service sector took a big hit today with
the OSX index falling 3.35%. Shares of SLB paced the decline
with a 3.47% drop of its own and broke through support at the
$60.00 mark and its 100-dma. This looks like a bearish entry
point for a run toward the $55 level or its 200-dma. Traders
might also watch for another failed rally under the $60.00 level.
---
Sears Roebuck - S - close: 40.10 change: -0.35
WHAT TO WATCH: Sears has under performed its peers in the retail
group for weeks. When the RLX retail index was hitting new all-
time highs shares of Sears were inching toward a breakdown. That
breakdown occurred yesterday under support of $41.00. Now S is
trying to hold on to support at $40.00. Currently its P&F chart
points to a $29.00 price target. We would consider new bearish
positions on a move below $39.50.
---
Zimmer Holdings - ZMH - close: 80.95 change: +0.42
WHAT TO WATCH: ZMH has weathered the recent market weakness very
well. Shares have held support at the $80.00 despite the market
sell-off. Its technical indicators are mixed with a bearish MACD
while short-term oscillators are flattening out. Bulls might
want to consider new positions if ZMH can trade back above the
$82.00 level.
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Option Spread Strategies
************************
Spicing Up The Zero-Plus Strategy
By Mike Parnos, Investing With Attitude
Back in the beginning of February we put on the Zero-Plus
strategy. It was originally designed for the conservative
trader. We started with a hypothetical account of
$100,000. We then purchased $74,000 of Zero-Coupon Bonds
that will mature in seven years at a value of $100,000.
This, in effect, guaranteed our investment.
With the remaining $26,000 we purchased three OEX December 2006 calls,
with a strike price of 540, for $24,300. Now, we did this with the
assumption that, over time, the market would appreciate and we would be
the beneficiaries of this appreciation, all the while having our
$100,000 guaranteed. While we are waiting for the market to go up,
we’re generating some pocket money every month by selling a far out-of-
the-money OEX calls against our 2006 OEX 540 calls. We’re also putting
on a far out-of-the-money bull put spread each month to bring in a few
more bucks. Everything has been going as smooth as can be.
Well, that’s all fine and dandy. And, if the market goes up, we should
be just fine. Will the market go up? Probably. How much? Only time
will tell.
As you all know, I’m a patient kind of guy. But, this way of making
money, although safe, is like watching paint dry. I may be able to
watch endless reruns of Everybody Loves Raymond, but my patience is
wearing a little thin waiting for the market to go up.
Getting Conservatively Aggressive
We’re tying up $24,000 of our hard earned dollars with those Dec. 2006
OEX 540 calls. We’re generating about $500-$600 per month on the
“while we’re waiting” plays, but that’s chicken feed. While that might
excite the chickens, maybe we can assert ourselves a little more and
bring in a little more.
What if we were to change our game plan slightly? Perhaps we should
apply the CPTI portfolio strategies to our Zero-Plus position. The
$26,000 of cash we have to work with represents at least two 10-contract
10-point iron condors plus one 5-point iron condor – not too unlike our
typical CPTI portfolio.
The above projection of possible positions is based on using a broker
that only holds maintenance on one side of our Iron Condor positions.
Let’s also titillate our profit taste buds by adding another nuance to
our plan. Let’s compound our return by adding our profits to our
trading capital.
If, in one month, we make $3,000, we will then have $29,000 to use as
maintenance on the next month’s trades. That means we will be able to
trade more contracts and, in turn, generate more profits. This is
starting to look pretty lucrative.
In our monthly CPTI portfolio, we don’t use our profits. We’ve been
basically thinking of them as cash flow and just sticking them in our
mattress or buying necessities like microwave popcorn and underwear.
Can you imagine how much we would have accumulated had we would have
rolled those profits every month into subsequent trades?
Real Or Pie In The Sky?
I better take off my shoes again. It’s time to calculate. Projecting
stuff is really fun. As you know, you can manipulate numbers to say
almost anything you want. But, in this case, it’s quite realistic.
I figured that, in our CPTI portfolio, we’ve averaged a 7% monthly
return on our maintenance. I just applied that same 7% to the Zero-Plus
$26,000, compounded it monthly, and, in one year, our $26,000 would have
turned into $58,558. That’s a profit of $32,558.
Taking it a step further, that means we have made – in one year -- 32.5%
on our original $100,000 investment (of which our $100,000 is 100%
safe). Can we do this year after year until the Zero-Coupon bonds
mature? We sure can try. And, remember, every year we’ll be starting
with a larger figure for our calculations. Even with occasional draw-
downs, that would make it a lot easier.
I’m probably starting to sound like Carleton Sheets or Wade Cook, but
the calculator doesn’t lie (much). Look at the chart below. Isn’t it
pretty? If you like green, you can’t help but love this chart.
Is This Strategy For Everyone?
Every week I receive emails from CPTI students who are conservatively
taking in money and watching their accounts grow. Even with CPTI
positions, there is some risk involved.
I also receive emails from skeptics – and that’s fine. There is no such
thing as an investment without some degree of risk. They’re reluctant
to put their hard earned dollars out there. This Zero-Plus strategy is
the next best thing to a sure thing. The one thing that is certain is
that your initial investment is safe – unless our government collapses.
And, regardless of which idiot is running the country, we have enough
checks and balances to keep the US afloat.
You could always put your money into one of the 10,000+ mutual funds.
You could give your money to a financial planner. Hell, you might as
well give it to the Salvation Army. But, ask yourself, why are you
reading this column? Don’t you want to take control of your
investments? Your future?
If you consider the Zero-Plus platform and combine it with our CPTI
strategies, you can’t lose. Your might lose your mind. You might
you’re your car keys. But, if you keep your hands off those Zeroes,
there’s a good chance you be able to add quite a few zeroes to your net
worth when all is said and done.
____________________________________________________________
MAY CPTI POSITIONS
Remember, May is a five-week option cycle. Get comfortable. We're going
to exercise some patience and self-discipline. That's the best kind of
exercise. It beats the hell out of a Stairmaster. It's more profitable,
too - usually.
May Position #1 - SPX Iron Condor – 1113.89
We sold 10 SPX May 1080 puts and bought 10 SPX May 1070 puts for a total
credit of $1.90 ($1,900). Then we sold 7 SPX May 1175 calls and bought 7
SPX May 1190 calls for a credit of $1.40 ($980). Our total net credit
and potential profit is $2,880. Our maximum profit range is 1080 to
1175. Maintenance: $10,500.
May Position #2 - RUT Iron Condor – 567.25
We sold 10 RUT May 620 calls and bought 10 RUT May 630 calls for a
credit of $1.20 ($1,200). Then we sold 10 RUT May 540 puts and bought 10
RUT May 530 puts for a credit of $1.30 ($1,300). Our total net credit
and profit potential is $2,500. Our maximum profit range is 540 to 620.
Maintenance: $10,000.
May Position #3 - MNX Iron Condor - $143.14
We sold 10 MNX May $152.50 calls and bought 10 MNX May $157.50 calls for
a credit of $.80 ($800). Then we sold 10 MNX May $140 puts and bought 10
MNX May $135 puts for a credit: $.95 ($950). Our total net credit and
profit potential is $1,750. Our maximum profit range is $140 to $152.50.
Maintenance: $5,000.
May Position #4 - BBH Iron Condor - $150.31
We sold 10 BBH May $155 calls and bought 10 BBH May $165 calls for a
credit of $.70 ($700). Then we sold 10 BBH May $135 puts and bought 10
BBH May $125 puts for a credit of $.70 ($700). Our total net credit and
profit potential is $1.40 x 10 contracts = $1,400. Our maximum profit
range is $135 to $155. Maintenance: $10,000.
______________________________________________________________
ONGOING POSITIONS
QQQ ITM Strangle - Ongoing Long Term -- $35.64
We bought 10 contracts of the 2005 QQQ $39 puts and 10 contracts of the
2005 QQQ $29 calls for a total debit of $14,300. We make money by
selling near term puts and calls every month. Here's what we've done so
far: Oct. $33 puts and Oct. $34 calls - credit of $1,900. Nov. $34 puts
and calls - credit of $1,150. Dec. $34 puts and calls - credit of
$1,500. Jan. $34 puts and calls - credit of $850. Feb. $34 calls and $36
puts - credit of $750. Mar. $34 calls and $37 puts - credit of $1,150.
Apr. $34 calls and $37 puts - credit of $750. May $34 calls and $37 puts
- credit of $800. Total credit: $8,850.
Note: We haven't included the proceeds from this long term QQQ ITM
Strangle in our profit calculations. It's a bonus! And it's a great cash
flow generating strategy.
ZERO-PLUS Strategy. OEX – 544.54
In my Feb. 8th column, I outlined a strategy based on an initial
investment of $100,000. $74,000 was spent on zero coupon bonds maturing
in seven years at a value of $100,000. The principal $100,000 investment
is guaranteed. We're trading the remaining $26,000 to generate a "risk
free" return on the original investment.
Long Term: Bought 3 OEX Jan. 2006 540 calls @ $81 (x 300 = $24,300)
March: Sold 3 OEX 585 calls @ $3.10 (x 300 = $930)
March: 535/525 Bull Put spread for credit of $1.10 (x 300 = $330).
Bought back 3 OEX March 585 calls for $.10 & sold 3 of March 560 calls
for $1.35. A credit of $1.25 x 300 = $375.00. Bought back March 560
calls for $.15, locked in profit of $120 x 3 = $360. Cash position is
$3,320 ($1,620 plus the unused $1,700). Our cash position as of April
expiration is $2,640 plus unused $1,700 = $4,340.
The April 570 OEX call expired worthless. The OEX 515/505 bull put
spread also expired worthless. (Isn't this fun?)
New May Zero Plus BPS Position
We sold 5 OEX May 530 puts and buy 5 contracts of May 520 puts for
credit of $1.10 (x 5 contracts = $550).
We sold a call against our long 540 call. We sold 5 OEX April 575 calls
for $1.40 (x 5 contracts = $700).
If both of these plays work out, we can add another $1,250 to our cash
total - just a little bonus while we wait for the market to go up.
OSX Calendar Spread Plus - $104.10
OSX is the Oil Index. This is a play on the common belief that oil
prices will continue to move up over the next month or two. Bought 10
OSX June $115 calls (36 delta) and sold 10 OSX April $115 calls (23
delta) at a cost of $2.15 ($2,150). We also put on an April $100/$90
bull put spread and took in an extra $.70 ($700) to reduce the cost
basis to $1.45 ($1,450). We rolled out our April $115 call and took in
$1.20 - further reducing our cost basis to $.20. Then, aggressive
traders (which we are in this strategy) put on the May $100/$90 bull put
spread and took in $.95. So, now we are a "plus" $.75. In the best-case
scenario, the OSX will finish just below $110 at May expiration.
______________________________________________________________
New To The CPTI?
Are you a new Couch Potato Trading Institute student? Do you have
questions about our educational plays or our strategies? To find past
CPTI (Mike Parnos) articles, first look under "Education" on the OI home
page and click on "Traders Corner." For more recent columns, you can
look under "Strategies" and click on "Combinations." They're waiting for
you 24/7.
_____________________________________________________________
Happy Trading!
Remember the CPTI credo: May our remote batteries and self-discipline
last forever, but mierde happens. Be prepared! In trading, as in life,
it's not the cards we're dealt. It's how we play them. Your questions
and comments are always welcome.
Mike Parnos
CPTI Master Strategist and HCP
_____________________________________________________________
Couch Potato Trading Institute Disclaimer
All results reported in this section are hypothetical. While the numbers
represented here may have been achieved or beaten by our readers, we
make no representation that any individual investor achieved these exact
results. The tracking for the plays listed in this section uses closing
prices for the day the newsletter is published and it is not meant to
imply that any reader actually received those prices or participated in
these recommendations. The portfolio represented here is hypothetical
and for investment education purposes only. It is only an illustration
of what type of gains a knowledgeable investor might receive utilizing
these strategies.
**************
TRADERS CORNER
**************
Planning To Fail
by Mark Phillips
mphillips@OptionInvestor.com
I've always been an overly organized person, going all the way
back to childhood. My parents have shared stories of the degree
to which I would plan my activities, even those that were "just
for fun". Every year, we'd spend a long weekend at the coast,
camping near the beach. I liked to build sand castles and on the
4-hour drive to the campground, I would routinely sketch and plan
just what this year's castle's design would be. Then I'd spend an
entire afternoon with shovel in hand, creating what I'd designed
on the drive. Some years, I'd spend a second afternoon, striving
for a more perfect implementation. There was no reason for this
analytical approach except that is how I approached everything I
did, even from an early age. It probably could have been just as
much fun to just show up and start moving sand here and there –
but the results wouldn't have been nearly as good.
I share this story so you have an understanding that I'm
predisposed to planning my activities, whether leisure or more
serious. This trait has served me well over the years, from
helping me to manage to slog through a dual engineering major to
landing my first engineering job at NASA, to laying out the
designs for some of the complex control systems for which I had
responsibility to design, install and operate during my tenure in
that role.
I've been an avid long-distance runner for most of my life,
beginning long before I even entered junior high school. I
planned out every aspect of my running, from which 'course' I'd
run each day of the week, how I would build up my mileage and then
peak for each important race. The results speak for themselves,
as I completed my first marathon when I was 15, winning my age
group and beating my time goal by nearly 20 minutes.
I'm not trying to make the point of what I have accomplished with
my life, because I know that doesn't matter one whit to any of
you. The point I'm trying to convey is that realistic planning
plays an important (I would argue critical) part of success in any
venture. This reality applies to trading just as it does to any
other aspect of life. Certainly, one can be too focused and
organized, planning the joy right out of life -- a perfect example
is my story above about the sand castles. But properly applied,
planning in any area of life will enhance the results and more
than likely shorten the amount of time it takes to move from point
A to point B. I can't remember where I first ran across the
saying, but it is one I've carried with me for many years and I
think it is important for us to all keep it in mind. "If you fail
to plan, you're planning to fail." That really lays it out there,
doesn't it?
So let's turn our focus to trading and talk about planning. I
understand there are traders out there that trade for the
excitement or "juice", craving the adrenaline rush of winning or
beating the market. Me, I couldn't care less about that. I trade
to make money -- that's it! I don't care if it is exciting or
boring, just so I can look at the equity balance and see it
growing month after month, preferably right along the projected
trajectory that I've laid out in my plan.
If your reward from trading is financial, then your planning
should be done with the waypoints and end goal defined in terms of
account growth. If it is the excitement of winning spectacular
victories against the market that is important to you, then you
need to find a way to quantify your results and work towards
achieving your goal. The bottom line is that if you're trading
without a plan for how to succeed, then I seriously doubt whether
you'll be successful as a trader over the long term. That's a
harsh statement, I know. But my job isn't to coddle or appease –
it is to share what I believe to be the important lessons I've
learned in the years that I've been trading.
Here's a list of questions that I think are important to consider
when deciding how we're going to proceed. What do you want to
accomplish with your trading efforts over the next year? Two
years? Five years? Is that a realistic goal, starting out from
where your account is today and what your current skill level is?
If so, then what are the weekly and monthly goals that will get
you to that end destination? If not, then what are the
deficiencies? Is the account growth curve that you're wishing for
too steep? Or can you reach your goals by just adding to your
skills and knowledge?
Becoming a successful trader is like earning a college degree. We
have to pay our tuition (taking courses, and suffering those early
educational losses), study (subscribe to online educational sites
like Option Investor, read books and study the charts and
indicators), work out sample problems (paper trade) and then apply
all that we've learned on the final exam (live trading).
Human nature is such that we want the quick fix. We don't want to
pay the price for success, if we can find a short-cut. The man
said there's no such thing as a free lunch. It's true. If
success was easy, then we wouldn't appreciate it. Do you scan the
site for play candidates and then enter those trades because they
were recommended? Or do you take the written plays as the
starting point for your own research and decide for yourself
whether it is a trade that fits within your own trading plan? If
you don't feel you can competently do the research on your own to
confirm or refute the points made in a given play writeup, then
guess what? You've put the cart before the horse. You're trying
to take the final exam (trade live money) before studying and
working out the sample problems and learning from the process.
Sure, the right way forces us to forgo the desire for instant
gratification. But jumping in and getting a few early wins
without doing the requisite work and planning is apt to give a
false sense of security. What happens next is that we increase
trade size and charge ahead, thinking we are good traders, when in
reality we've just had a short run of good luck. Don't think it's
just you! In my experience, this reality applies to ALL traders
at different stages of their development. Some step back, realize
they need to be better prepared, re-tool and then move forward
with greater humility and success. Others never learn from the
early mistakes and continue to beat their head against the wall
until they burn through all of their emotional capital and give up
dejected and in disgust, or burn through all their actual capital
and have to leave the playing field.
Nothing would make me happier than to know that everyone reading
these words is nodding their head, agreeing with me because these
are lessons they've already learned and view this as just a good
reminder. Unfortunately, I know that isn't the case. We have two
other groups out there. The first one thinks they can do it their
own way, without a plan. They're smarter than the market and
they're going to go out there and show everyone how smart they
are. None of those people have bothered to read this far though,
as they very quickly figured out at the top of this article that I
didn't have anything important to share about what the market will
do tomorrow or where a winning trade might be found. I can't save
them from themselves, and I won't waste my effort trying. The
third group is largely made up of fairly new traders. They have
seen what is possible through the world of option trading, but
haven't yet figured out how to make it happen. This is the group
I'm trying to reach with this article.
I hope I haven't made the process sound too daunting, because it
really doesn't need to be. Trading should be approached just like
any other business. You wouldn't start a landscaping business
without first figuring out all the details and WRITING A BUSINESS
PLAN. So why should we dive into trading without a plan? We
shouldn't, at least not if our goal is to become consistently
profitable over time.
So what are some of the things that we ought to consider when
writing our plan? How about what instruments to trade, what
timeframe we'll be trading over -- intraday, swing trading or
position trading? What tools will we use? We need to have live
charts -- what timeframe charts will we use, what indicators will
we apply and what rules for entry and exit will be applied? What
about trade size? I think the most important question that must
be answered by our trading plan is one of money/account/position
management. Any monkey can tell you where to enter a trade and if
your money management is structured properly, you'll make money
over time. The smartest technician can tell you where to enter
trades, and you'll lose money over time if you don't have a well
thought out account management plan.
This was a VERY hard concept for me to grasp early in my trading
career and I made a lot of expensive mistakes before coming to
understand just how important it is. So let me restate it as
clearly as I know how. The best trading system in the world will
be doomed to failure if it does not incorporate a prudent money
management plan. Entering a trade with potential for a $300 gain
with a $300 stop loss would be an example of poor risk control.
Entering a trade with potential for $1000 gain and a stop loss of
$300 is an example of good risk control.
Let's say we've set a goal of $1000 per week for our trading
business. We find a trade with $1000 upside potential and $300 of
risk. Instead of putting on an initial position that is 3% of our
account size, we decide to go for the gusto and put on a larger
position (15% of account size) because we "know" we're right this
time and we can really juice the monthly results. WRONG!!!!!
This is a perfect example of what NOT TO DO. On a single trade,
we've put 15% of our account at risk, completely abandoning the
discipline that got us to this point. We're sacrificing
discipline and steady account growth for the excitement of a big
win. This is almost always a recipe for disaster.
I can't tell you specifically what ought to be in your trading
plan, but I think if you've honestly answered each of the
questions above and would be comfortable sharing the questions and
your answers with your spouse or significant other, then you're
well on your way to a long-term successful trading plan. If you
really want to know how solid your trading plan is, sit down with
one of your trading associates or even someone that is business
minded and walk through your trading plan with them. Your goal at
this point is that you WANT them to find problems with it. If you
can't defend the plan against reasoned arguments, then it is a
safe argument that it isn't yet ready for prime time. But if the
plan CAN withstand the scrutiny from a 3rd party, it's a good bet
you're ready to at least start testing it out, first with paper
trades and then with live trades using real money.
Speaking from experience, I can say that it will never be
complete, as there are always new lessons to be applied and
incorporated into the plan. But even if it isn't perfect, having
a plan that we adhere to for each of the trades we place will put
us that much closer to our goals, both in the short term and the
long term. Remember, it isn't a race. It's an endurance event.
Our foremost goal is to stay in the game, keeping our account
balance on the rise, whether that rise is shallow or steep.
Plan to win!
Mark
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